Banking and Enterprise Reform in the People’s Republic of China after the Asian Financial Crisis: An Appraisal

This paper evaluates recent banking and enterprise reforms in the People’s Republic of China since the Asian financial crisis. It argues that the bad debt problem and the losses in state-owned enterprises (SOEs) are highly interdependent, and that both can be traced back to a lack of managerial autonomy, adequate incentive mechanisms, and control structures. However, recent efforts to stabilize the financial system and to reform SOEs do not address these issues, as they are largely redistributive, shifting financial losses between different agents of the economy rather than improving the efficiency of both the financial and real sectors. Major reforms are proposed that properly address the problem of bad debts and SOE losses.